Myths and misconceptions about financial statement analysis abound.
Credit department personnel have some misconceptions; customers and
by salespeople have others. Some of the more common misconceptions
include:

Myth: Financial statements analysis should be used
to establish credit limits for customers. Reality: Financial statement
analysis is part of a more comprehensive process of risk assessment.

Myth: Financial statements audited by a CPA that
include an unqualified auditor's opinion should be considered totally
reliable. Reality: If the Enron bankruptcy has reminded us of anything,
it is that audited financial statements are not always totally
reliable.

Myth: Requesting financial statements from privately held companies
is asking for trouble. Reality: It is true that many privately held
companies do not want to share their financial data with creditors.
It is NOT true that a request for financial statements is always
a problem. Requests of this type are routine.

Myth: Unaudited financial statements are better
than nothing. Reality: Unaudited financial statements may be worse
than nothing. They may include false and misleading information,
they may not conform to accounting rules, or they may be entirely
fraudulent. Unaudited financial statements should not be taken
with a grain of salt - but rather with a bucket of salt since there
is little chance the creditor will be able to independently confirm
their accuracy.

Myth: Comparing individual customer performance
to industry norms is a good way to benchmark customer performance.
Reality: It is a way to measure performance, but industry norms
are calculated using financial information provided to credit bureaus
- but the ratios and industry norms provided as benchmarks may
not actually be representative of the financial performance of
the majority of companies or customers.

Myth: A customer with a current ratio if less than
2 to 1 is an accident waiting to happen. The customer is at serious
risk of being unable to retire debts as they come due. Reality:
Many companies operate successfully with tight current ratios -
especially if these companies have made arrangements allowing the
company to borrow short term to meet its current obligations.

Myth: A strong current ratio means the company
under review is highly liquid and will pay debts as they mature.
Reality: It is possible for a customer to have a strong current
ratio, but be unable to pay creditors. It is a question of timing.
If liabilities come due before assets can be converted into cash
the company may be in trouble. Also, because a company has the
ability or the cash to pay its creditors on time does not mean
the customer will do so.

Myth: The quick ratio [or acid test ratio] is a
good way to measure a customer's liquidity. Reality: The quick
ratio is a more sensitive measure of liquidity than the current
ratio. A strong quick ratio does not guarantee that a customer
can and will pay creditors' bills as they come due.